Employment status is increasingly important as new ways of working, such as in the ‘gig economy’, become more commonplace. Organisations providing daily services to consumers, such as food delivery and taxis, or providing courier services to other employers, rely on a workforce who may be combining work with education or caring responsibilities, or who just want a better work-life balance, and who therefore wish to work only when they choose to. Employers need to know what their responsibilities are in this new environment.

This factsheet explains the legal tests for employment status, and why they are important for establishing workforce rights and employer responsibilities. It describes how employment status has been, and continues to be, defined by case law, and outlines how the law might change in this area as a result of the Taylor report. Finally it reminds organisations of their responsibilities in view of the legal risks involved.

The contractual terms on which an organisation engages someone to provide their services or labour is fundamental, and organisations need to determine at the outset whether an individual is an employee, a worker or self-employed. Organisations should set out in writing the terms under which someone is engaged to provide work for it, and communicate these terms to the individual so that both parties are very clear about their employment status and the key employment rights that are, or are not, associated with their status.

Although there is a lot of attention on the rights of people working in the gig economy, confusion about employment status has been a well-established focus of employment tribunal cases for many years. These cases often show that it’s the reality of the working relationship that determines someone’s status and not necessarily what is written down in a contract. This means that an organisation needs to pay close attention to how it manages the relationship with an individual, particularly if they are self-employed. This means being careful not to place expectations on the working relationship that are more aligned with the employment status of ‘worker’.

There are three principal categories of employment status:

  • employees working under a contract of employment, who have full employment right
  • the genuinely self-employed, who are independent contractors
  • workers who have a status in between employment and self-employment.

Organisations may have all three categories in their workforces. For example, a chief operating officer, with responsibility for finance, facilities and IT, reporting to the chief executive, and fully integrated within the business, is likely to be an employee. The organisation might engage a freelance designer to work on marketing brochures, who is running their own business and has other clients. This person is self-employed. Its part-time sales representatives, who receive a retainer and commission for sales achieved, may be workers.

But these labels don’t determine employment status – this depends on the terms of the contract between the business and the individual and how the arrangements operate in practice. There are also other types of status, such as partners and members of limited liability partnerships (LLPs), directors and other office holders.

Employment status has come under significant public and government scrutiny in recent years in the wake of new working practices, such as zero-hours contracts, and the supply of labour via digital platforms, typified by the ‘gig economy’.

Which status applies has significant implications. Businesses must deduct income tax and National Insurance (NI) contributions via PAYE (as defined in tax legislation – see below), and pay employers’ NI (generally at 13.8% of gross earnings) for each employee. Independent contractors are responsible for paying their own tax and national insurance on the fees they receive.

There are also other costs. Employees are entitled to paid holidays, sick pay and, provided they have enough service, statutory maternity/paternity/shared parental and adoption pay, statutory redundancy pay, and protection from unfair dismissal (see full list below). Workers are entitled to the National Minimum Wage/National Living Wage (NMW), working time rights and holiday pay. Independent contractors have minimal workplace rights, such as health and safety protection and protection against discrimination.

The tests for determining whether someone is an employee are set out in case law (most importantly Ready Mixed Concrete v Minister of Pensions and National Insurance. Factors indicating employment include the individual having to:

  • provide services personally
  • perform work when it is offered (the organisation also has to be obliged to provide it – this is called ‘mutuality of obligation’)
  • be subject to the organisation controlling the way the work is done
  • be integrated into the business (for example, by being part of a team).

If the nature, length and pay and benefits of the engagement are consistent with other employees, then this person is likely to be an employee.

Individuals running a business on their own account, and providing services to an organisation as a client of that business, are self-employed. In practice, the dividing line between employment and self-employment can be blurred.

Factors tending to suggest self-employment include the individual:

  • actively marketing their services outside the organisation, retaining discretion over how the services are provided, and possibly providing a substitute
  • not being integrated within the business, or subject to a high level of control
  • supplying their own equipment
  • accepting the risk that they will not get paid if the work is not done for whatever reason, including illness and holidays
  • submitting invoices for fees, and possibly expenses, to which VAT may be added
  • has no right to be offered assignments and no obligation to accept them.

Workers tend to have some of the characteristics of both. It can be thought of as a catch-all category to provide those who would otherwise be self-employed, but who have some employee characteristics (such as a degree of control by the business), with meaningful legal rights.

Employees work under a ‘contract of service’; the self-employed work under a ‘contract for services’. Workers provide services personally to an organisation but under an arrangement that is looser than employment.

CIPD members can find out more in our Employment status law Q&As.

Definitions for tax and employment purposes

The legal test for determining whether someone is an employee from a tax viewpoint is not the same as the test used to determine the extent of his or her employment rights. In some circumstances, they may be taxed as an employee but not meet the legal test for employment law purposes.

When it comes to employment rights, the principal statutory definition of a ‘worker’ is found in section 230(2) of the Employment Rights Act 1996.

Tax legislation does not recognise the concept of ‘worker’, but instead uses a binary employed/self-employed test. Section 4 of the Income Tax (Earnings and Pensions) Act 2003 defines ‘employment’ for income tax purposes, and section 122 of the Social Security Contributions and Benefits Act 1992 defines ‘employment’ for NI purposes.

Where has case law got to on the issue?

The statutory definitions of a ‘worker’ have been further embellished by a number of recent cases involving the so-called ‘gig-economy’. The main issue in claims brought against organisations such as Uber, Pimlico Plumbers and CitySprint has been whether the claimants were genuinely self-employed, or workers. Generally they could not be employees because they were able to work only the hours they chose, or no hours at all.

Since the Supreme Court’s decision in Autoclenz Ltd v Belcher, the courts are significantly more willing to look beyond the contractual documents (and the labels applied to each party) to the substance of the relationship in practice. For example, in Aslam v Uber BV, the employment tribunal saw past the contractual documents between the company, the drivers and the passengers, and found (despite the contracts saying the opposite) that Uber drivers were workers and entitled to the NMW and paid holidays. This was upheld by the Employment Appeals Tribunal, and Uber’s appeal from this ruling is due to be heard by the Court of Appeal later in 2018.

The Court of Appeal’s decision in Pimlico Plumbers Ltd v Smith emphasised the importance of the outward appearance of the working relationship. The company alleged the claimant was a self-employed professional, but he drove a van (hired from the company) with the company’s branding. This suggested the plumber was not running a business on his own account, but was subordinate to the company. As a result, he was a ‘worker’ for the purposes of the Working Time Regulations 1998.

One case which has bucked the trend is IWGB v Deliveroo. Here the Central Arbitration Committee found that Deliveroo riders were not workers but self-employed, because the contract between the company and the riders did genuinely allow riders to substitute for each other, meaning the riders were not providing personal services to the organisation.

This area of law is likely to continue to change in the next few years both as a result of the courts’ response to the new working practices typified by the gig economy, and new legislation.

The Taylor Review of modern working practices was asked to look at how government should respond to the new models of working - read our response. In autumn 2017, the Work and Pensions and the Business, Energy and Industrial Strategy Parliamentary Committees published their own report A framework for modern employment, which included draft legislation implementing some of the Taylor Review’s recommendations.

In February 2018, the government responded to both reports, accepting most of the recommendations, and issuing four consultations, one of which concerned employment status.

Clarifying legal definitions

The government has proposed that ‘worker’ status, with limited employment rights, should be retained, but is consulting on how to make the definitions of worker, self-employed, and employee clearer. It is asking whether the existing case law tests should be put into legislation, whether new tests should be developed, and whether the definitions should be aligned for employment rights and tax purposes.

While there is no proposal to reduce the difference between the tax and NI contributions of employees and the self-employed, both forms of taxation could increase if independent contractors are re-categorised as workers or employees.

The Taylor Review recommended that gig economy workers, operating through online platforms, should be entitled to a piece rate under the NMW, and one of the consultations is looking at how to define this type of working under the working time rules. The Low Pay Commission has been asked to explore the impact of introducing a higher NMW rate for hours not guaranteed as part of the contract.

Enforcement

The government agrees that the state, rather than individuals, should be responsible for enforcing core employment rights, such as NMW, sick pay, holiday pay and unlawful deductions, for the lowest paid employees and workers, and is planning to gather evidence on the scale of the problem. There is to be more targeted enforcement activity to stamp out “illegal and exploitative” unpaid internships, and confirmation that interns who are classed as workers and/or employees must be paid the NMW.

The government has suggested there should be a simpler way of enforcing tribunal awards (including ‘naming and shaming’ organisations that do not pay) and stronger penalties for employers that ignore previous tribunal judgments. This is likely to result in higher tribunal awards in the future against organisations that do not act on a tribunal ruling against them on employment status.

Statement of contract terms

New secondary legislation has been introduced in Parliament giving workers the right to itemised pay slips. Employees already have this right. The government has also agreed that workers should have the right to:

  • a statement of their key terms (as employees do)
  • request more predictable and stable contracts, especially those on zero hours contracts and agency workers.

Consultation is taking place on how best to achieve both of these, and on the Taylor Review’s recommendation that continuity of service should be preserved if there is gap in employment of less than one month (currently one week’s gap breaks continuity).

Our Contracts of employment factsheet has more on contracts and the written statement of particulars.

Questions about employment status typically occur when there is a dispute over employment rights. It could be that employment has come to an end and an individual wants to make an unfair dismissal claim (only possible for employees) or that someone working for an organisation believes they should be entitled to paid annual leave (only possible for workers and employees). If there is no dispute about any contractual terms, then the relationship can continue for many years without any certainty about employment status.

The gig economy has led to an increase in atypical contracts to suit the needs of the changing nature of work for both employers and the workforce. Gig economy workers get paid for each ‘gig’ (for example, food delivery) they complete. They are not guaranteed hours or job security from their employer. The growing incidence of people carrying out work of this nature has led to the stream of cases currently going through the courts and tribunals, which have sought to establish the employment status of individuals operating within the gig economy, and their associated employment rights.

Organisations need to be clear about the employment rights and responsibilities attaching to every job role, including whether those carrying out work for them are employees, workers or self-employed contractors. This requires an understanding of the rights attaching to each employment status.

Employees are distinguished from workers in that they have to right to be protected against unfair dismissal. They also have the right to:

  • a statutory redundancy payment after two years’ service
  • a companion during a disciplinary or grievance hearing
  • protection from unlawful deduction from wages
  • paid annual leave, statutory maternity, paternity, adoption, and shared parental leave and pay, and statutory sick pay
  • NMW/NLW
  • protection from discrimination and from mistreatment following whistleblowing
  • TUPE protection (during a transfer of undertakings)
  • minimum statutory notice, a written statement of particulars within eight weeks of the contract start date, and an itemised pay slip
  • health and safety protection
  • request flexible working
  • paid time off for trade union duties, and for ante-natal care, and unpaid time off to deal with emergencies for a dependant
  • auto enrolment on to a pension scheme.

Workers are entitled to the same rights as an employee, except that they:

  • have no unfair dismissal or TUPE protection
  • are not entitled to receive a statutory redundancy payment, or statutory maternity, adoption, paternity or shared parental leave and pay
  • have no right to time off to deal with emergencies for a dependant, for ante-natal care, or for trade union activities
  • have no right to request flexible working
  • have no right to a written statement of particulars, itemised pay slip or statutory notice period.

Both employees and workers are entitled to weekly and daily statutory rest breaks under the Working Time Regulations 1998, although they may choose to opt out of the 48-hour working week and work for longer. They can cancel the opt-out by giving their employer 7 days’ notice, or agree a longer notice period, provided this doesn’t exceed three months.

Self-employed contractors have no employment rights, apart from health and safety protection and, in some cases, protection from discrimination and from mistreatment following whistleblowing.

Organisations currently using a range of contracts, such as fixed-term, agency or zero-hours contracts, should be considering whether these are still the right choice in terms of the flexibility of resource that the business requires, and the need for flexibility and stability for those working for them.

Employers should ensure that their statement of written particulars expressly states whether a person in the workforce is an employee or a worker, and stipulates what statutory rights employees and workers are entitled to. An organisation can offer above the statutory requirements for some or all of the rights, but cannot offer below the statutory legal limits.

Businesses should check whether they have an opt-out clause on working time in operation within their contracts or in a separate document, and should remind line managers that this opt-out does not exempt employees or employers from their duty of care under health and safety legislation.

While employers are legally obliged to provide an itemised pay slip for employees, it is good practice to provide these for workers too, and could become law under the proposals currently being considered by government.

Organisations should ensure all workers, or those on varying contracts, are aware of any vacant positions within the business, so that they can apply for a more stable contract, if they so wish.

Contacts

Acas – Employment status 

GOV.UK - Employment status 

HMRC - online tool to check a person’s employment status for tax 

Journal articles

Determining employment status. (2017) Labour Research. Vol 106, No 1, January. pp16-18.

Employment status in the 21st century. (2018) IDS Employment Law Brief. No 1090, April. pp11-18.

CIPD members can use our online journals to find articles from over 300 journal titles relevant to HR.

Members and People Management subscribers can see articles on the People Management website.

This factsheet was written by Jane Mann, Fox Williams LLP, Rachel Suff (for the CIPD viewpoint) and other members of CIPD staff.

Jane Mann

Jane Mann: Fox Williams LLP

Jane Mann is a partner at City law firm Fox Williams, where she heads up the firm’s employment/HR law team, which was shortlisted for its human resources work in the Legal 500 Awards 2018.

Jane advises both organisations and senior executives, with particular emphasis on those from the technology/gig economy, financial, insurance and professional services sectors. She combines extensive experience of defending employers facing employment claims, with business/legal advisory work, and is an expert on cross-over employment and regulatory issues. She has often had to advise organisations on business critical issues, such as the employment status of their workforce. She co-founded the Employment Lawyers Association, and is associated with many leading employment and HR groups.

Rachel Suff

Rachel Suff: Employee Relations Adviser

Rachel joined the CIPD as a policy adviser in 2014 to increase the CIPD’s public policy profile and engage with politicians, civil servants, policy-makers and commentators to champion better work and working lives. An important part of her role is to ensure that the views of the profession inform CIPD policy thinking in ER areas such as health and well-being, employee engagement and employment relations.

As well as developing policy on UK employment issues, she helps guide the CIPD’s thinking in relation to European developments affecting the world of work. Rachel is a qualified HR practitioner and researcher; her prior roles include working as a researcher/editor for XpertHR and as a senior policy adviser at Acas.

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